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Earnings, Consumption and Lifecycle Choices

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  • Costas Meghir
  • Luigi Pistaferri

Abstract

We discuss recent developments in the literature that studies how the dynamics of earnings and wages affect consumption choices over the life cycle. We start by analyzing the theoretical impact of income changes on consumption - highlighting the role of persistence, information, size and insurability of changes in economic resources. We next examine the empirical contributions, distinguishing between papers that use only income data and those that use both income and consumption data. The latter do this for two purposes. First, one can make explicit assumptions about the structure of credit and insurance markets and identify the income process or the information set of the individuals. Second, one can assume that the income process or the amount of information that consumers have are known and tests the implications of the theory. In general there is an identification issue that is only recently being addressed, with better data or better "experiments". We conclude with a discussion of the literature that endogenize people's earnings and therefore change the nature of risk faced by households.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15914.

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Date of creation: Apr 2010
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Publication status: published as Earnings, consumption and lifecycle choices , (with Luigi Pistaferri) Handbook of Labor Economics, Ashenfelter and Card eds., 2011
Handle: RePEc:nbr:nberwo:15914

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  1. Yuriy Gorodnichenko & Klara Sabirianova Peter & Dmitriy Stolyarov, 2009. "Inequality and Volatility Moderation in Russia: Evidence from Micro-Level Panel Data on Consumption and Income," International Center for Public Policy Working Paper Series, at AYSPS, GSU, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University paper0905, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
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  4. Orazio Attanasio & Erich Battistin & Hidehiko Ichimura, 2004. "What Really Happened to Consumption Inequality in the US?," NBER Working Papers 10338, National Bureau of Economic Research, Inc.
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  6. Fatih Guvenen, 2006. "Learning your earning: are labor income shocks really very persistent?," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 145, Federal Reserve Bank of Minneapolis.
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  17. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, Elsevier, vol. 18(1), pages 83-114, January.
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Citations

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Cited by:
  1. Huggett, Mark & Kaplan, Greg, 2011. "Human capital values and returns: Bounds implied by earnings and asset returns data," Journal of Economic Theory, Elsevier, Elsevier, vol. 146(3), pages 897-919, May.
  2. Mark Huggett and Greg Kaplan, 2012. "The Money Value of a Man," Working Papers, Georgetown University, Department of Economics gueconwpa~12-12-02, Georgetown University, Department of Economics.
  3. Gabriela Prelipcean & Mircea Boscoianu, 2014. "Stochastic Dynamic Model on the Consumption – Saving Decision for Adjusting Products and Services Supply According with Consumers` Attainability," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, Academy of Economic Studies - Bucharest, Romania, vol. 16(35), pages 201, February.
  4. Gustavsson, Magnus, 2013. "Permanent versus Transitory Wage Differentials and the Inequality-Hours Hypothesis," Working Paper Series, Center for Labor Studies, Uppsala University, Department of Economics 2013:12, Uppsala University, Department of Economics.
  5. Tom Krebs & Moritz Kuhn & Mark L. J. Wright, 2011. "Human Capital Risk, Contract Enforcement, and the Macroeconomy," NBER Working Papers 17714, National Bureau of Economic Research, Inc.
  6. Mark Huggett & Gustavo Ventura & Amir Yaron, 2010. "Sources of Lifetime Inequality," Working Papers, Human Capital and Economic Opportunity Working Group 2011-020, Human Capital and Economic Opportunity Working Group.
  7. Stephen Jenkins & Peter Lambert, 2011. "Robert Moffitt and Peter Gottschalk’s 1995 paper ‘Trends in the covariance structure of earnings in the US: 1969–1987’," Journal of Economic Inequality, Springer, Springer, vol. 9(3), pages 433-437, September.

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